Encana Corp. has launched an
internal investigation after the State of Michigan said it is examining
allegations that the company worked with rival Chesapeake Energy Corp. to avoid competing in state land
auctions for shale gas.

Michigan’s Department of Natural Resources said it is working with the
Attorney-General’s Office to review a series of e-mails, published by the
Reuters news agency, that purport to show executives from the two companies
discussing joint approaches to bidding.

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“Our department is committed to ensuring the integrity of its auctioning
process and to receiving fair market value for resources on public land,” Ed
Golder, a spokesman for the Department of Natural Resources, said Monday. An
official from the U.S. Justice Department declined to comment on whether its
antitrust division is looking into the matter.

Encana chairman David O’Brien said
Monday that “an investigation of this matter was immediately initiated,” and the
company “takes compliance with all laws very seriously and is committed to
ethical business conduct in all that we do.

In one e-mail, Chesapeake chief executive officer Aubrey McClendon is alleged to have said it was time to
“smoke a peace pipe” with executives from Calgary-based Encana, Canada’s largest natural gas company and a
major competitor of Chesapeake in the Michigan land sales.

The alleged revelations come just a week after Mr. McClendon was stripped of his chairman’s role at
Chesapeake amid concerns that he used personal stakes in gas wells to obtain
$800-million (U.S.) in loans.

Responding to questions about whether Chesapeake acted improperly in the
Michigan land sales, spokesman Jim Gipson said in
a statement: “While there were discussions between Encana and Chesapeake in 2010 about forming an
‘area of mutual interest’ [AMI] joint venture regarding leases in Michigan, no
such agreement was reached between the parties and no AMI was formed,” Mr. Gipson said. “Nor did Encana and Chesapeake make any joint bids.”

He noted that Chesapeake has invested about $400-million (U.S.) to acquire
leases in Michigan. In trading Monday, Chesapeake shares were down as much as 9
per cent, while Encana was off more than 4 per
cent.

Some of the e-mails outlining plans for co-operation were allegedly authored
by Mr. McClendon or Encana's U.S. president, Jeff Wojahn, and some purport to show they were copied
to Encana CEO Randy Eresman. Mr. Eresman and Mr. Wojahn were not available to comment, a company
spokesman said.

Agreements on areas of mutual interest are very common in the energy
industry. Under those, two companies can agree that one will bid on a parcel of
land, for example, and then each side will take an interest in lands
successfully acquired. Those practices can exist in a legal “grey” area, one
lawyer familiar with the arrangements told The Globe, but they are widespread.
Under such deals, however, companies agree on areas in which they will jointly
conduct business, rather than exclude competitive behaviour.

In 2009 and 2010, Michigan was one of the hottest plays for companies eager
to develop shale gas resources in the United States. Slumping prices have since
cooled the gold rush mentality that prevailed at the time.

In e-mails allegedly between Chesapeake and Encana, the rivals appear to be repeatedly
discussing how to avoid bidding against each other in a public land auction in
Michigan two years ago and in at least nine prospective deals with private land
owners there.

In one e-mail, dated June 16, 2010, Mr. McClendon allegedly told a Chesapeake deputy that
it was time “to smoke a peace pipe” with Encana “if we are bidding each other up.”

The Chesapeake vice-president allegedly responded that he had contacted Encana “to discuss how they want to handle the
entities,” and said “we are both working to avoid us bidding each other up in
the interim.” Mr. McClendon
replied: “Thanks.”

The Michigan allegations come as Encana is
battling low gas prices, weak results, and questions about its strategy as the
company increasingly focuses on oil and natural gas liquids. A plan to boost
spending by $600-million in this area sent the company’s shares tumbling last
week. The allegations remain a long way from being assessed in court.

But if collusion were to be proven, especially in the U.S., the consequences can be serious
and lead to stiff penalties. In the U.S., those wronged by collusion are
entitled to triple damages, and because anti-competitive practices often affect
large numbers of people, class action lawsuits are common.

It’s not clear whether that might be the case in Michigan.
But “In cases where there are many potential plaintiffs, the damages can
be very significant,” said Peter Glossop, an
antitrust lawyer with Osler Hoskin & Harcourt LLP.

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